Direct Revelation versus Signalling

Dan Bernhardt and Greg LeBlanc

Canadian Journal of Economics, 1995, vol. 28, issue 4a, 858-85

Abstract: An entrepreneur wishes to communicate private information to investors to secure a desirable financial contract. The entrepreneur can signal project type through its choice of capital structure or can directly reveal sufficient information so that its type is known. Information directly revealed is observed by a rival, who may enter and appropriate some of the project's rents. Conditions under which either of these communication policies are chosen are determined. When local incentive compatibility is sufficient for global incentive compatibility, the authors show that each type either reveals just enough information to credibly communicate its type, or instead reveals no information, and signals.

Date: 1995
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